The Cost of Land and the High Cost of Housing

The high Cost of Land is frequently cited a the reason why house prices are so high or why there are insufficient affordable houses.

The problem is its simply not true. The cost of land is derived from the value of the house once its built and the value of the house is a function of supply and demand.

The cost of land is calculated by taking the value of the completed house, what it can be sold for, less the total costs of building it. The total building costs are, of course, the costs of the labour and materials, the interest costs incurred during the construction phase and a developers / builders profit (usually a percentage of total costs).

So if a house costs £150,000 to build but it is worth £350,000 then the cost of the land will be £200,000. If the house is only worth £250,000 then the value of the land is £100,000.

So if politicians want to make housing more affordable or to increase the number of affordable homes they simply have to increase the supply of housing. They do this by granting more planning permissions. Unfortunately existing householders who are, of course, voters tend not like a falling housing market or more houses being build close to where they live.